Are low priced stocks that pay high dividends a good choice?Ireally do not understand how this is done. If the stock price is low and hovers at that low price that would give the impression that the company is not a high performer. On the other hand, dividends are paying out profits, how could these stock prices reflect a poor performer and yet have so much in profits they have to give it away?
SAVAGE SAYS: I am going to recommend a terrific short book that will give you the complete answer to your question. It is Charles Carlson’s “The Little Book of Big Dividends,” published by Wiley. In fact, I thought the book was so great that I agreed to write the preface for it!? I said it is a book that EVERY investor should read — because it explains the relationship between dividends and prices, and tells you how to choose stocks that offer good dividends — and good value.
A low stock price isn’t the sign of a good investment. And a high dividend yield may not be such a good stock to buy, either — because the low stock price relative to the dividend could mean the smart money is selling the stock (causing share price to fall) because they are worried that the dividend will be cut!
Companies pay dividends as a reward to shareholders. If the company is growing fast, it may not pay such a high dividend, because it needs the cash to expand. And that fast-growing but low-dividend company could be a good investment!? So you can’t just compare stock prices and dividend payouts without understanding all the possibilities. And I promise that if you read this book you will have an answer to every aspect of your question!